The P/B-ROE Model Revisited

29 Pages Posted: 23 Apr 2004  

Jarrod Wilcox

Wilcox Investment, Inc.

Thomas K. Philips

NYU Tandon School of Engineering - Department of Finance and Risk Engineering

Date Written: March 10, 2004

Abstract

A two-stage stock valuation model derived from Wilcox's (1984) P/B-ROE approach is shown to be a surprisingly effective tool for a broad variety of uses, including the explanation of current prices and the prediction of future return differences. This applies both to the cross-section of individual US stocks and the time-series of the S&P 500 index. In addition to offering a new closed-form expression for firm value, the model measures the investment horizon over which the market predicts exceptional profitability, demonstrates the dependence of expectations for future profitability on past volatility of return on equity, and quantifies the extent of the recent US stock price bubble. Perhaps its most persuasive result is its no-look-ahead statistical support for tactical asset allocation.

Keywords: P/B, ROE, Valuation, market efficiency, TAA, Tactical Asset Allocation, explanation, prediction

JEL Classification: G12, G14, G30, G31

Suggested Citation

Wilcox, Jarrod and Philips, Thomas K., The P/B-ROE Model Revisited (March 10, 2004). Available at SSRN: https://ssrn.com/abstract=534442 or http://dx.doi.org/10.2139/ssrn.534442

Jarrod Wilcox

Wilcox Investment, Inc. ( email )

950 Centre Street
Newton, MA 02459
United States
617-332-4666 (Phone)

Thomas K. Philips (Contact Author)

NYU Tandon School of Engineering - Department of Finance and Risk Engineering ( email )

Brooklyn, NY 11201
United States

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